Understanding CPM

Update: This post was written in 2012 and will not reflect the changes to United’s MileagePlus program that will occur on March 1st 2015. Understanding this concept is still important so this post will be left here for archival purposes. 

One of the key concepts to getting the most out of your travel awards program is understanding CPM. CPM usually means Cents Per Mile, Cash Per Mile, or Cost Per Mile; it’s a way to measure the relative cash value of a reward redemption. It’s also a way to determine the amount of miles received per cash spent if you’re buying something that gives you a miles credit (like airfare).Let’s take a look at buying something using miles.

The most basic way to calculate CPM, when buying something using miles, is to take the cash cost of whatever it is you’re thinking of obtaining using award miles, and dividing that cost by the number of miles you’ll need to use in order to get it.

For example, let’s say there is an item on United’s Award Mall that you want. For this example, we’ll use an Apple iPad2 because it has a fairly large market and a stable price history.

As you can see United is willing to trade this for 92,900 miles, but at the time of my writing, this same item goes for $399 at Best Buy. 399÷92,900 = $0.0043 (0.43 CPM). For every mile you redeem you’re getting a cash value of less than half a cent.

If you are new to this concept, you may be wondering if this is a good use of your miles. Hold that thought for now, we’ll revisit it in just a moment.

First, let’s take a look at another use for miles: United reward travel.

Calculating the CPM for reward travel is a bit different; there are more things to account for. The best way to explain this is by example, so let’s say that we wanted to take the non-stop flight from Houston (IAH) to Tokyo (NRT) about a month from now.

Flight from Houston to TokyoAs you can see, it will cost 65,000 miles and $53.60 in order to book this award, and this same flight is offered for $1,198.50. As I said earlier, the math here is a bit different, because we have to take into account that it costs 65,000 miles plus $53.60 and that award tickets do not accrue any miles. If you were to buy this ticket for cash instead of miles, you would pay $1,198.50, and you would also be awarded 13,250 miles for the trip.

The formula for all of this isn’t too hard: ($cost_of_ticket – $cost_of_award-fees)÷(miles + miles_not_accrued). So, ($1,198.50 – $53.60)÷(65,000 + 13,250) = $0.0146 (1.46 cents per mile). For every mile you spend, you’re getting about a penny and half in cash value.

NOTE: I calculate CPM a bit differently here than what you may see on some other sites; which just divide the miles by the cash. If I were to do that with this example we would get an inflated CPM of 1.84. I think it’s better the way I do it because it properly conveys the fees and opportunity cost of not gaining award miles.

I’m sure you’ve already put it together, but the iPad example is a very inefficient use of miles. It makes more sense to just pay cash for the iPad and save the miles for a Travel Award.

That basically covers CPM for buying things with miles, so we’ll cover CPM from the other direction: gaining miles with cash.

In our previous example, our flight from Houston to Tokyo cost $1,198.50. When you buy a ticket you’re also awarded Miles that you can redeem for travel, upgrades, or waste on a $399 iPad2. Frequent flyers are always looking to get the most miles per dollar spent, and will often take the cost of a flight and divide it by the amount of miles awarded in order to determine CPM. The formula is simple: ($cost_of_ticket ÷ miles_accrued). For our Tokyo flight it would work out like this ($1198.50 ÷ 13,250) = $0.09 per mile (9.0 CPM). For every nine cents you spent on this ticket you gained one reward mile. As a traveler you want this number as low as possible, but don’t let CPM dominate your decision. The whole point of buying a ticket is to travel, not to fuss over how many reward miles you’re going to get from it.

Still, wouldn’t it be nice if you got 23,186 miles instead of 13,250? Well, that’s how many a Premier Platinum gets; their CPM works out to be 5.0 cents per mile for the Tokyo route we’ve been using. This is one of the better perks of getting Premier status with United’s program; you are able to more efficiently acquire miles. If you have Premier Status of any sort with United, you’ll need to adjust your CPM calculation to take into account your bonus mile perk.

If you want a point of reference: Try to aim for over 1.5 CPM when you use miles and under 6.0 CPM when you buy a ticket with cash. One last thing: Don’t let these guidelines stop you from using your miles how you want, that’s not the point of this post.

Well, that’s everything I wanted to say about CPM for now. I’ll cover how to maximize CPM in future posts.